The IR35 penalty regime can be costly and time-consuming for contractors, especially if they face action by HMRC in a tax tribunal and the courts.
Note that the days of a negotiated settlement with the contractor’s accountant ended in 2009: the regime requires taxpayers to exercise reasonable care — to check what should be the correct tax position. Companies and contractors may face an inspection by HMRC and the imposition of penalties.
Under the “deemed payment” rules a contractor caught within the IR35 rules — and thus regarded by HMRC as a “disguised employee” — can be liable for up to 25% more tax and NICs per year, and without any attendant employment rights.
The HMRC may charge interest on any tax and NICs owed. Penalties will be levied where the contractor is regarded as “careless” in under declaring the tax liability — the penalty is likely to be 30% of unpaid tax. Further and steeper penalties can be imposed by HMRC if it can be proved that the IR35 rules were deliberately ignored or flouted — the penalty will be 70% of unpaid tax. Similarly, if an engager or agency deems someone to be outside IR35 when in fact they are caught by the rules, they will be liable to pay any taxes and NICs to HMRC, plus any penalties. These taxes may be “clawed back” as far as 6 April 2017.